Feeling stressed and worried may be the first reaction of many company managers when they are directed to initiate a layoff. They are stressed by having no choice but to proceed with the layoff, and they are worried about the uncertainties inherent in terminating employee’s contracts. Layoffs involve numerous legal issues and the possibility of unexpected events. Therefore, having a good plan of action is crucial to the successful implementation of a layoff. 

How should a layoff plan be optimally structured? What should be included in such a plan? To answer these questions, this article summarizes our experience dealing with layoffs and delivers key strategies to help those companies currently facing the need to lay off staff.

What factors need to be considered when making a layoff plan?

Each company will have a unique workplace culture as well as a particular objective for the reduction in staff. Before management can make an optimal plan for a layoff it must consider: the internal character of the company; the layoff project itself and the external environment in which the business operates. We will discuss these in turn.

1. The company itself

In practice, because each company is different, layoffs which may involve the same legal basis and issues tend to differ significantly from each other. In our experience, the internal features that deserve special attention are as follows: First, is the employment relationship harmonious or not? Second, is there an influential trade union? Third, is the trade union (if any) cooperative or adversarial? Fourth has the company gone through a layoff before, if so, how was it implemented and what was the result? This information will help management foresee obstacles and may provide solutions or approaches that will avoid problems.

2. The particular layoff project

Under this head, there are three points on which management should focus:

First, the reason for the layoff and its implications. Management can best decide on the description of the layoff and provide accurate answers to queries raised externally or by employees by figuring out 1) whether the layoff is caused by uneconomic performance; 2) If it is a multinational enterprise, whether the layoff project is part of a global plan or not; 3) what effect the layoff might have on the company’s operation; and 4) whether the layoff will influence the company’s subsidiaries or affiliated companies in China (if any).

Second, details about the employees to be laid off. These include 1) basic information such as their salary levels, service years, employment contract terms and educational backgrounds; 2) their numbers and roles, such as the percentages of frontline workers and managers respectively; and 3) any specially protected employees who appear on the layoff list, perhaps those who are prenatal, perinatal, breast feeding or recovering from illness, or employees with work-related injuries sustained during their term of service. Additionally, if dispatched employees are being laid off, the company needs to communicate with the labor dispatch entity on the settlement plan and procedure for return to the dispatch entity.

Third, the budget for the layoff project and the employees’ settlement plan. Calculating how much money the company will need to spend, deciding whether incidental recruitment will be needed and finding out whether there are vacancies at affiliated companies for some of the laid-off staff.

All this work will help management make a good compensation and settlement plan for each laid-off employee.

3. The external environment

There are many external factors which can have an impact on a company laying off employees.

It is useful to have background information about normal salary levels in the region of the business, how other companies in the area have conducted layoffs and compensation standards, etc. Today, information is spread quickly and widely via media and social communication tools, and employees will have compensation expectations driven by local information sources.

The attitude of local government towards the layoff will affect the implementation of the project. Management should strive for smooth communication with relevant government personnel, and check to ensure there are no special requirements in local regulations.

The macroeconomic climate and social environment may also be important. Will execution of the layoff be affected by a current or upcoming national political or economic event?

Consideration of these matters will help the company formulate a realistic and practical layoff plan and make implementation easier.

What should a layoff plan cover?

After a comprehensive consideration of the factors mentioned above, the company may produce an overall and detailed layoff plan in writing so as to guide implementation. The plan may have the following parts.

1. Timing and detailed procedures

A start and end date with, in between, detailed procedures to follow, critical junctures and milestones with flexible time in reserve. A sound schedule will promote effective progress and avoid excessive delays.

2. The allocation of responsibilities

The company will need to appoint an overall manager in charge of implementing the layoff plan and a team with perhaps members from human resources, the legal department, finance, logistics, IT, administration and security. If anyone from this team will also be laid off, then the company will need to tell them and consider if they must keep the layoff plan confidential in order to avoid damage to its implementation. Incentivizing the members of a layoff team may need special attention.

3. The compensation package for laid-off employees

The company must have a thorough scheme for compensation which at least includes the compensation standards for general employees, a settlement plan for special employees, the bottom line for negotiations, any vacancies that can be offered and so on . The compensation scheme is the most essential and confidential part of the whole layoff plan.

4. Handling Emergencies

There should be an emergency plan, prepared in advance, to deal with such contingencies as a riot.

5. Document Preparation

The company should set out its position in legal documents prepared in advance, such as termination agreements, unilateral termination notices,notices for employee meetings, agreements on internal position changes, etc. Management could also prepare supporting information, such as Q&A, to help employees understand the background and reasons for the layoff, and to facilitate communication between the company and its employees.

6. Democratic Procedures

PRC employment laws require companies to follow certain democratic procedures when deciding on important issues directly affecting the vital interests of employees. However, the relevant clause does not mention layoff projects when defining important issues. Management will need to decide whether to use democratic procedures during a layoff according to the actual circumstances. In practice, many companies encourage their employees to participate in developing a layoff plan even though this is not a legal requirement.

7. Training

The company may invite legal professionals to train those staff members who will communicate directly with the employees being laid off. Human resource officers and department managers especially, may be coached in communication skills and relevant law.

8. Strategies for communicating with administrative departments

According to Article 41 of PRC Employment Contract Law, a company shall submit a layoff plan to the labor administrative department when it makes a layoff for economic reasons. Other than Article 41, there are no requirements for communicating with the labor administrative department if the layoff occurs for other than economic reasons. Nevertheless, for large and sensitive layoffs it may be beneficial to talk in advance with administrative departments so as to ensure their support.

9. Public Relations

The media is usually interested when a large or sensitive layoff is announced. People affected, competitors, suppliers, customers or others may take the opportunity to attack the company and may mislead the public. The company must have a plan for communicating with media, and watch for any media reports that relate to the layoff project. When necessary, the company should put out its own media releases so as to be sure that the media has accurate information about the layoff and to correct any misinformation that is reported.

In addition to our suggestions, companies will of course develop their layoff plans based on their particular circumstances at the time. Prior to undertaking a layoff, the company will need to keep the plan confidential, in order to avoid provoking misunderstanding, panic or even resistance among employees.

In brief, a good plan is half the battle. A thorough, delicate and scientific layoff plan, as guidance for action, will considerably decrease the uncertainty in the process and lay a solid foundation for implementing the layoff and resettling employees.